Reverse Charge Mechanism in Service Tax: A Complete Guide

As we know service tax is indirect tax, the liability to pay tax in case of indirect tax is of service provider. So the primary liability to pay the service tax to the government in is of service provider, it is called normal charge. When a service receiver is made liable to pay service tax, it is called reverse charge. A whole set of rules and regulations are made for reverse charge which is known as reverse charge mechanism.

Section 68(2) empowers central government to notify taxable services for which service tax shall be paid by prescribed person in prescribed manner.

Reverse charge mechanism can be divided into two parts:

Full reverse charge

Partial reverse charge

Full reverse charge

It is the situation where entire service tax payment is made by the service receiver.

As per notification No. 30/2012 dated 20.06.2012, central government has notified services for whom entire service tax is payable by service receiver as listed below.

Insurance Agent Services: Services Provided or agreed to be provided by an insurance agent to any person carrying on insurance business.

Good Transport agency’s Services: Services provided or agreed to be provided by an Goods Transport Agency in respect of transport of goods by road, where the person liable to pay freight is :-

Any Factory

Any Society

Any Co-operative society

Any dealer of excisable goods

Any body Corporate

Any Partnership firm

Note: The person who pays or is liable to pay freight for the transportation of goods by road in goods carriage, located in the taxable territory shall be treated as the person who receives the services for the purpose of this notification.

Sponsorship Services: Services provided in the nature of sponsorship to any body corporate or partnership firm located in taxable territory.

Legal Services: Services provided or agreed to be provided to any business entity located in the taxable territory by:-

An arbitral tribunal

An individual advocate or a firm of advocates, by way of legal services.

Note: Services are exempt if the turnover of such business entity in the preceding financial year does not exceed Rs. 10 Lac .

Support services by Government: Services provided or agreed to be provided to any busness entity located in the taxable territory by Government or local authority by way of support services excluding:-

Renting of immovable property, and

Services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act, 1994.

Renting of motor vehicle: The taxable services provided or agreed to be provided by way of renting of motor vehicle designed to carry passengers on abated value to any person who is not engaged in the similar line of business by any individual/HUF/partnership firm (whether registered or not) including association of persons, located in the taxable territory to a business entity registered as body corporate, located in the taxable territory.

Services provided by a person located in non taxable territory.

Director’s Services to the company.

Recovery Agent’s Services provided to a banking company or financial institution or non banking company.

Supply of manpower Services by any individual/HUF/Partnership firm ( whether registered or not) including association of persons, located in taxable territory to a business entity registered as body corporate located in taxable territory.

Security Services by any individual/HUF/Partnership firm ( whether registered or not) including association of persons, located in taxable territory to a business entity registered as body corporate located in taxable territory.

Lottery selling or marketing agent’s services to a lottery distributor or selling agent.

Services involving an aggregator : Taxable services provided or agreed to be provided involving an agrregator in any manner. Therefore the companies which act as aggregartor for service like travel portals, food portals or cab services will now liable to pay service tax.

Partial Reverse Charge

Under Partial reverse charge the service provider and receiver pays the service tax in a ratio set under the Act.

S.No.

Services Provided by any individual/HUF/Partnership firm (whether registered or not) including association of persons, located in taxable territory to a business entity registered as body corporate located in taxable territory.

% of service tax Payable by the service Provider

% of Service Tax Payable by any person liable for paying service tax (other than service provider)

1

Provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers on non abated value to any person who is not engaged in similar line of business

50%

50%

2

Provided or agreed to be provided in service portion in execution of works contract

50%

50%

Important points regarding reverse charge mechanism

Point of taxation for service recipient: Cases where service recipient is liable to pay service tax under reverse charge mechanism, the point of taxation will be the date of payment or Completion of three months from the date of invoice, whichever is earlier.

Assessable Value for Service Recipient: The value on which service receipient will pay service tax under reverse charge mechanism will be Payment made by him to the service provider including out of pocket expenses.

Small service provider exemption for Service recipient: Benefit of small service provider exemption is not available to the service recipient under reverse charge mechanism.

Cenvat Credit for Service Recipient: The service recipient under reverse charge mechanism is required to pay the service tax liability in cash.

Refund of Cenvat Credit: If a service provider provides the notified services under section 68(2) and he is unable to utilize the CENVAT credit available on inputs services for payment of service tax on such output services, then he shall be allowed refund of such unutilized CENVAT credit.

The conditions for such refund are given in notification No. 12/2014-CE(N.T) dated 03-03-2014.

In case of 100% reverse charge, where entire service tax is paid by service receiver, the service provided by the service provider is not regarded as output services, hence he will not be entitled to take CENVAT credit of taxes paid for provision of such services.

Hey readers, welcome to my blog investsaver.com. I am Chartered Accountant by Profession and I love to write on tax & money matters. You may ask your queries through comments related to the topic, I will be happy to answer them.

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Comments

Sir,
I am a Mutual Fund Distributor and earn commission. This service was under Reverse Charge Mechanism(RCM) till 31.3.16. From 1.4.16 Service tax has been levied on the service provider i.e. ourself. I registered with the Service Tax for the first time in June,2016.
My question is whether I will get the basic exemption limit of Rs.10 Lacs or not. Fact is my previous / current gross receipts are way above Rs.10 Lacs.
My plea is, had I would not be in RCM, then I would have been given the exemption, second I have registered with you for first time, I should get the exemption.
What is your view, Sir.
Regards
Raman K Agarwal

We are an Insurance Broking Company and receive commission from the Insurance Companies. Is there any Service Tax Liability upon us regarding the Commission received from the Insurance Companies?
or, The services of Insurance Broking Company shall be termed as Insurance Agent Services and RCM shall be applicable?

I understand you must have taken the agency of various insurance companies. Which brings you under insurance agent definition. Since you are providing services to the insurance companies you under RCM.

Our client a goods transport agency wants to register under service tax act.His turnover upto date is 8.5 lacs for current year.However some clients of his deposit service tax under reverse charge.However some who are unregitsered are not depositing tax.
Does liability of those people shift to him and he should deposit that service tax.What is his liability for such bills for which service tax is not being paid ny service receiver

From 1st April 2016 any service excluding 1) renting of immovable property, and 2) services specifies in sub clause i, ii, iii of clause a of section 66D provided by government or a local authority to business entities have been covered under reverse charge mechanism.

I would like to know if we do a service provider business from 1st april 2017 -30th august 2017 then whether we have to charge service tax as Service tax is payable on 20 Lacs from 1st sep 2017 onwards.

I read your blog and many thanks for the information explained in a very simplistic manner for the non finance persons to also understand it.

I have a query, as follows: Is service tax payable under the normal service tax or reverse service mechanism applicable if a company (based in India) has acquired advertising and signage rights from an overseas company for an event that is not being held in India and the company (based in India) is selling the advertising and signage acquired, to overseas clients and clients not based in India?